The statutory provision is far from being a “Star Chamber” clause (as originally described in In re Greys Brewery Company (1884) 25 Ch D 400 at 408), referring to the secretive Elizabethan court proceedings where prisoners were forced to answer self-incriminating questions.

Times and attitudes have changed and the Court recognised that the power of summoning persons and ordering production of books can assist in promoting corporate governance.

The Singapore provision mirrors Malaysia’s section 249 of the Companies Act 1965 and this case would be of persuasive value here.

BACKGROUND FACTS

The appellants were PricewaterhouseCoopers and two of its audit partners (“Auditors”). They were the former auditors of Celestial Nutrifoods Limited (“Celestial”), a company formerly listed on the Singapore exchange. It was incorporated in Bermuda and had three wholly-owned British Virgin Island (“BVI”) subsidiaries. In turn, these BVI subsidiaries were the investment holding companies for subsidiaries incorporated in the People’s Republic of China (“PRC”).

Celestial was wound up in 2010 and a private liquidator (“Liquidator”) was appointed. After taking control of Celestial, the Liquidator discovered that the group’s operating companies, management and directors were all based in the PRC. He was unable to obtain any meaningful assistance from them with regard to the affairs of Celestial and of its subsidiaries.

The Liquidator identified several key suspicious and/or irregular transactions undertaken by Celestial and the group which warranted further investigation.

As Celestial did not have the funds to enable the Liquidator to investigate the suspicious transactions, the Liquidator entered into a funding agreement with several creditors in 2012. The funding agreement was sanctioned by the High Court.

Thereafter, the Liquidator filed an application under section 285 of the Singapore Companies Act (“section 285”) against the Auditors. The Liquidator wanted the Auditors to disclose documents in their custody, power or control relating to Celestial’s trade dealings, affairs and property, including documents given to the Auditors by Celestial’s subsidiaries. The application also sought for an oral examination of the two audit partners.

The Auditors had provided the Liquidator with three arch-lever files of documents. They only contained high-level consolidation schedules, limited company and subsidiary level financial information, year-end balances and other minutes which the Liquidator had already recovered from other sources.

The Liquidator sought further documents from the Auditors to allow him to reconstruct the financial records of Celestial and to investigate the suspicious transactions. These included the general ledger and trial balance(s) of each entity in the group, bank statements and bank reconciliations by each entity, a register of fixed assets of each entity, loan facilities documents, contracts, detailed creditors and debtors schedule. In particular, the Liquidator also sought the Auditors’ working papers.

The Auditors resisted the application. They argued that the Liquidator was not objective, the Liquidator’s true motivation in making the application was to obtain evidence for a negligence suit against the Auditors, the disclosure may be illegal under PRC law, and that the request was too wide.

The High Court allowed the Liquidator’s application and the Auditors filed an appeal to the Court of Appeal.

PRELIMINARY POINT

Although a preliminary point was raised as to whether the Court of Appeal had the jurisdiction to hear the appeal as the Auditors had not obtained leave to appeal to against the interlocutory order by the High Court, their Lordships decided to consider the merits of the appeal as there was no earlier Court of Appeal decision which precluded it from doing so.

THE POWER TO SUMMON PERSONS CONNECTED WITH THE COMPANY: TWO-STAGE TEST

As mentioned, the Singapore section 285 mirrors section 249 of the Companies Act 1965. Both sections provide that the Court “may summon before it any officer of the company or … any person whom the Court deems capable of giving information concerning the … affairs … of the company.” Further, the Court may “require him to produce any books and papers in his custody or power relating to the company.”

Provisions similar to section 285 may be found in other jurisdictions such as in England (section 236 of the UK Insolvency Act 1986), Australia (section 597 of the Corporations Act 1989) and Hong Kong (section 221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance).

The Court of Appeal held that section 285 is couched in very generous terms and should not be interpreted in a restrictive manner. It is not limited to eliciting such information as would reconstitute knowledge which the company once had or had been entitled in law to possess. This is the more constrictive view seen in some of the English decisions, for instance, in Cloverbay Ltd (Joint Administrators) v Bank of Credit and Commerce International SA [1991] Ch 90.

Instead, the Court of Appeal preferred the more expansive view as adopted by the Singapore High Court in W&P Piling Pte Ltd v Chew Yin What and others [2004] 3 SLR(R) 164 (“W&P Piling”) which followed the House of Lords decision of British & Commonwealth Holdings Plc (Joint Administrators) v Spicer and Oppenheim [1993] AC 426.

This wider approach allows the power under the English-equivalent of section 285 to be invoked to assist in the accumulation of facts, information and knowledge that would enable or facilitate a liquidator to better discharge his statutory function. This includes information that the company may not have been apprised of prior to the onset of insolvency.

The Singapore Court of Appeal held that the grant of such an order would be a two-stage process:

The liquidator has to show some reasonable basis for his belief that the person can assist him in obtaining relevant information and/or documents, and that they are reasonably (and not absolutely) required. There is a general predisposition in favour of the liquidator’s views.

There is then a balancing of conflicting interests. On the one hand, the liquidator is usually a stranger to the affairs of the company, and may be unable to obtain information which he needs from the persons connected with the company. A liquidator requires a strong and cost-effective mechanism to enable him to discharge his functions, including determining the cause of the insolvency and whether to commence legal proceedings against any wrongdoers. On the other hand, in view of the inquisitorial power conferred by the provision, the court should be careful not to make an order that is wholly unreasonable or oppressive.

THE BALANCING EXERCISE

In carrying out the balancing exercise in the second stage, the following seven principles are instructive:

(i) No distinction should be made in the exercise of the power against officers of the company and third parties. The absence of a fiduciary or contractual relationship with the company in the case of third parties should not fetter the exercise of the power so long as the third party is able to provide relevant information or documents. The lack of a direct relationship between the company and the respondent is nonetheless a pertinent factor that would be considered.

(ii) The risk of a respondent being exposed to liability is a factor relevant to determining whether there would be oppression. But it does not bar the making of an order. This provision is to enable a liquidator to discover facts and documents relating to specific claims against specific persons. He is entitled to do so with as little expense as possible and with as much ease as possible. Nonetheless, the closer a proposed respondent is to being a defined target, the more oppressive an order for examination is likely to be.

(iii) An order for oral examination is much more likely to be oppressive than an order for the production of documents. An order for the production of documents involves only advancing the time of discovery if an action ensues. On the other hand, oral examination provides the opportunity for pre-trial depositions which the liquidator would otherwise not be entitled to. The person examined has to answer on oath and his answers can both provide evidence in support of a subsequent claim brought by the liquidator and also form the basis of later cross-examination.

(iv) The risk of exposure to a claim for serious wrongdoing/fraud carries with it an element of oppression. It is oppressive to require someone suspected of serious wrongdoing/fraud to prove the case against himself on oath before proceedings are brought. But it is not a conclusive factor as there is a public interest in the investigation of fraud.

(v) Attempts to gain undue advantages in the litigation process will also be closely scrutinised to prevent abuse.

(vi) Weight will be given to the risk that compliance might expose the respondent to claims for breach of confidence, or criminal penalties in the jurisdiction in which the documents are situated.

(vii) The practical burden imposed on a respondent when a great deal of time and expense is required to comply with an order for disclosure of documents.

PROCEDURE

The procedure for a section 285 application and examination is provided for under rules 49, 52, 55, 56 and 57 of the Singapore Companies (Winding Up) Rules. The Singapore provisions are almost identical to the same rules in our Companies (Winding-Up) Rules 1972.

The Court of Appeal adopted the following three points made by W&P Piling on the section 285 procedure:

(a) Rule 49 states that the application to the Court to summon persons for examination “shall” be made ex parte. Nonetheless, the Court of Appeal held that it is not mandatory that all applications be made ex parte. In the normal course of events, applications should be made inter partes. But the Court would be pragmatic if the liquidator is able to adduce some evidence that prior notice of such an application might result in the redefining of facts, or the concealment or destruction of documents.

(b) Secondly, in the absence of special considerations, a liquidator ought to elicit the co-operation of the proposed examinee before invoking section 285. It is sound practice for a liquidator to first make a written request for the documents he seeks or to submit a list of questions to the proposed respondent (or both).

(c) Thirdly, a liquidator should place his reasons for the application on record and on oath and this should be disclosed to the proposed respondent. But instances might well arise where, because of public interest considerations or sensitivity involving informants, the confidentiality of communications with the court might have to be strictly preserved. The court would in such cases be prepared to maintain the confidentiality of such information.

APPLICATION OF THE LAW TO THE LIQUIDATOR’S APPLICATION

Court’s Powers Not Limited by Availability of Pre-Action Procedures

The Singapore Court of Appeal held that section 285 does not provide that it should be restricted by pre-action procedures such as pre-action discovery. Further, it does not state that it cannot be used once a liquidator contemplates litigation. Section 285 is couched in very generous terms and should not be interpreted in a restrictive manner.

Stage 1: Threshold Requirement

The Court was satisfied that the Liquidator had shown that there was a reasonable belief that the Auditors were able to assist him, and that the documents he sought were reasonably required.

The Court rejected the Auditors’ assertion that the Liquidator was not objective based on two grounds, namely that the Liquidator was incentivised under the funding arrangement to pursue a claim against the Auditors and that the Liquidator sought to maximise recovery for the creditors by applying pressure on parties using section 285 to obtain more reasonable settlement offers.

The Court saw nothing objectionable about the funding arrangement. Firstly, although the Liquidator stood to recover half of his outstanding fees if he could identify potential claims, it was also in the interest of all the creditors that a proper investigation be done to determine whether there were any viable claims. The Liquidator was duty-bound to identify potential claims to maximise recovery for Celestial’s creditors. The Liquidator should not be hindered by allegations of bias merely because he too may benefit from the same.

Secondly, one of the Liquidator’s duties was precisely to maximise recovery for the creditors. The fact that some of the creditors had agreed to fund the investigation and pursue potential claims was irrelevant.

Stage 2: Balancing Exercise

The Court balanced various factors and found that the disclosure order would not be oppressive for the following reasons:

(i) It is legitimate for a liquidator to rely on section 285 to investigate whether a claim exists, and if so, to sue the party responsible. It would be a breach of a liquidator’s duty if he does not sue when there is a legitimate claim against a third party.

(ii) The Court recognised that the audit working papers did belong to the Auditors and contained proprietary information meant for internal use. But this does not mean that the disclosure of these documents cannot be ordered. The Court referred approvingly to English and Hong Kong authorities where working papers were ordered to be turned in. The papers should be disclosed as long as they contain information that is relevant to the liquidator’s investigation.

(iii) Next, the Court was not convinced that the Auditors would expose themselves to civil and criminal sanctions under PRC law if they were to comply with the disclosure order. The Auditors would also not be in breach of their duty of confidentiality owed to the PRC subsidiaries since the documents and information were disclosed pursuant to a court order.

(iv) Finally, the Court found that the disclosure order was not too wide. It was not uncommon for courts to grant orders compelling parties to disclose all documents in their possession, custody or control relating to the insolvent company in question. The Auditors also came from a respected and large audit firm. It should have kept proper records in relation to Celestial and should have the means to retrieve and disclose them expeditiously.

LOCAL APPLICATION

This Singapore Court of Appeal decision sets out useful guidelines for the grant of a Court Order under section 285 for the production of the documents, including the audit working papers.

As Malaysia has not had any appellate authority on the equivalent section 249 of the Companies Act 1965, this decision would provide guidance and be persuasive. The High Court decision of HICOM Bhd v Bukit Cahaya Country Resorts Sdn Bhd & Anor [2005] 8 CLJ 194 had already referred approvingly to the Singapore decision in W&P Piling.

On the risk of oppression where auditors are hauled up and questioned on oath, the Court Order in this case was only limited to the production of the documents, in particular the audit working papers. At the Singapore High Court level, the Court held that any oral examination of the Auditors would be premature. After the documents had been supplied, the Liquidator may have questions for the Auditors and these may be put and answered by letter. If the Liquidator considered that his questions had not been adequately answered, he may then make a further application to Court for oral examination in relation to the matters which have not been answered.

This may therefore provide some balance on the exercise of the power to summon such persons connected with the wound up company.